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United Rentals' (URI) Q2 Earnings Top, View Cut, Stock Down

United Rentals’ URI shares declined more than 6% in the after-hour trading session on Jul 17, following second-quarter 2019 earnings release. Despite reporting better-than-expected earnings and revenues, the company trimmed its full-year guidance to reflect "a slightly slower than expected pace for the BlueLine integration, as well as historically bad weather in several key regions this past quarter." This might have triggered uncertainties among investors and pulled the stock down.

Nonetheless, the company — which reported higher revenues across business segments due to the impact of BakerCorp and BlueLine acquisitions — has been witnessing improved demand in construction end-markets served. It remains upbeat about the second half of 2019 based on feedback from customers and the field, and increased free cash flow expectation.

Inside the Headlines

Adjusted earnings of $4.74 per share beat the Zacks Consensus Estimate of $4.48 by 5.8% and increased 23.1% from the prior-year figure of $3.85.

Total revenues of $2.29 billion surpassed the consensus mark of $2.27 billion by 1.1%. Moreover, revenues rose 21.1% year over year.

Rental revenues (including revenues from owned equipment rental, re-rent and ancillary) were also up 20.2% (increasing 4.8% on a pro-forma basis) from the year-ago quarter to a record $1.96 billion, buoyed by solid impact of BakerCorp and BlueLine acquisitions. The pro-forma improvement reflects growth in construction end markets served by the company.

Fleet productivity was down 3.1% year over year in the quarter, mainly due to the impact of BakerCorp and BlueLine buyouts. On a pro-forma basis, fleet productivity was up 0.7% from the prior-year quarter, attributable to improvement in rental rates and fleet mix, partially offset by a decline in time utilization owing to integration of the recent acquisitions, and adverse weather.

General Rentals: Segment equipment rentals’ revenues increased 14.6% year over year to $1.53 billion. Moreover, segment equipment rentals’ gross profit rose 9.2% from a year ago to $593 million. However, gross margin contracted 200 basis points (bps) year over year.

Trench, Power and Pump: Segmental equipment rentals revenues increased 44.8% year over year to $433 million. Equipment rentals gross profit rose 37.2% to $199 million, while gross margin declined 250 bps on a year-over-year basis. The downside was mainly due to the impact of the said acquisitions.

Overall Margins

The company’s total equipment rentals gross margin dropped 180 bps year over year to 40.4%.

Nevertheless, adjusted EBITDA increased 18.3% from the prior-year quarter to a record of $1.07 billion. However, adjusted EBITDA margin contracted 110 bps to 46.9% in the quarter, owing to the impact of the completed acquisitions. On a pro-forma basis, EBITDA margin advanced 40 bps.

Balance Sheet

United Rentals’ cash and cash equivalents totaled $75 million as of Jun 30 compared with $43 million in the corresponding period of 2018.

In the quarter, the company generated $923 million as net cash from operating activities, reflecting a decrease of 8.3% from the year-ago period.

Free cash flow was $205 million in the quarter (up 9.6% year over year).

Share Repurchase Program

In the first two quarters of 2019, United Rentals repurchased $420 million worth of stocks and reduced share count by 2.1% year over year. As of Jun 30, 2019, the company repurchased $840 million of common stock under its $1.25-billion share repurchase program.

2019 Guidance Updated

Total revenues are expected in the range of $9.15-$9.45 billion (versus $9.15-$9.55 billion expected earlier), reflecting an increase from $8.05 billion in 2018.

Net rental capital expenditures after gross purchases are projected in the range of $1.3-$1.4 billion compared with $1.442 billion in 2018. The company had earlier expected the same within $1.4-$1.55 billion.

Free cash flow (excluding the impact of merger and restructuring-related payments) is now expected in the range of $1.4-$1.55 billion compared with $1.3-$1.5 billion of prior expectation. The current guidance for the metric suggests an increase from $1.33 billion reported in 2018.

Both Aegion and Construction Partners’ three-five year expected EPS growth rate is pegged at 10%.

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